Islamic banking & finance institutions would neither pay interest nor earn interest. Bank-depositor relation would be based on the depositor sharing the profit accruing as a result of the bank's profitable use of the deposits pooled together. On the asset side a number of ways were tried to earn profits including partnerships and profit-sharing (mudaraba) with businessmen. Many Islamic banks entered into business directly, buying and selling commodities, land or real estate. Experimentation soon led to what is currently the predominant form of Islamic finance.
In a nutshell, the core idea behind commercial and investment banking, that of financial intermediation, is retained but the ethically repugnant practice of interest on loans is discarded. Within a short period of fifty years, the first half of which was devoted mainly to theory and model building, Islamic banking established itself as an alternative, claiming ethical superiority over conventional banking.
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Islamic Banking : Environment, Conception and Methodology
Thoughts on Islamic Banking: Articles Presented at the 2-Day International Seminar on Islamic Banking held under the auspices of Islamic Economics Research Bureau on the 15th and 17th DecemberDacca, Bangladesh, Islamic Economics Research Bureau, 1982, 57-62,
Professor M. Raihan Sharif
